Measuring the Adjusted Monetary Base in An Era of Financial Change

he adjusted monetary base is an index that measures the effects on a central bank’s balance sheet of its open market operations, discount window lending, unsterilized foreign exchange market intervention, and changes in statutory reserve requirements. Such an index is important because the long-run path of a monetary economy’s price level is primarily determined by the path of the central bank’s balance sheet, adjusted for the effects of changes in statutory reserve requirements. The St. Louis adjusted monetary base equals the sum of the monetary (or source) base and the reserve adjustment magnitude (RAM). This article presents a revised measure of the monetary base and a new RAM. The revised measure of the monetary base differs from previous measures by including all Federal Reserve Bank deposits held by domestic depository institutions; previous measures have excluded the aggregate amount of depository institutions’ required clearing balance contracts with Federal Reserve Banks. The new RAM recognizes that, since the Monetary Control Act of 1980, an increasing proportion of depository institutions have not significantly changed their demand for base money (vault cash and deposits at Federal Reserve Banks) relative to transactions deposits following changes in statutory reserve requirements. Previous RAM adjustments have assumed that depository institutions would match changes in their statutory required reserves about dollar-for-dollar with changes in their holdings of base money, following a change in reserve-requirement ratios. The new RAM, constructed from fifteen years of weekly data on more than 10,000 individual depository institutions, measures more precisely the change in the amount of base money demanded by depositories following changes in reserverequirement ratios than did previous RAM adjustments based on aggregate data.